I’ve remained neutral in the debate over Yellen vs. Summers for Fed chair. I continue to think they’re both fine choices… the differences… are far more narrow than you’d think from the frenzy…. Washington really loves a horse race and that the White House has misplayed this…. If I’ve put any bit of my thumb on the scale, it’s as follows, as quoted in the Times the other day: "All else equal, I would not lightly dismiss the opportunity to break a glass ceiling"…. But in the interest of fairness, I also wanted to weigh in briefly on ways in which Larry Summers views on financial market oversight… have been misrepresented…. I am well aware of mistakes he made in the Clinton years in this regard, but he learned from those mistakes, and frequently quoted Keynes’ line: “When the facts change, I change my mind.”…. Well in advance of the collapse of Bear and Lehman, Summers… wrote in late 2006 that “…innovations that contribute to risk spreading in normal times can become sources of instability following shocks to the system as large-scale liquidations take place.”

About a year later, when neither the Fed and nor other bank regulators were acting, Larry was insisting on the need for measures to protect the system and the flow of credit, arguing for something that ultimately became, from my perspective, one of the more important pieces of the Dodd/Frank reforms: increased capital buffers in lending institutions….

..The essential element, if there is to be more transparency in the financial system without a major credit crunch, is increased levels of capital. More capital permits more recognition of impairments and makes asset transfers easier by increasing the number of potential purchasers. It is preferable for the economy that banks bolster their capital positions by diluting current owners than by shrinking their lending activities. A critical element of regulatory policy should be insisting on increased capital in existing financial institutions.

I well recall his views on this issue of increased capital when he raised questions about certain regulations that I and others were pushing for, like the Volcker rule. But his challenges were nuanced. It was not that he didn’t believe in more oversight, or thought that banks with insured deposits should blithely trade their own books. It was that he believed that the financial “innovators” would always be numerous steps ahead of the regulators. So, I asked, where does that leave us? We should just give up? No, he said. We should pursue simple rules like ample capital and liquidity cushions, rigorous clearing house rules for transparency in derivative trades, caps on banks as measured by their percent of total assets.

I’m not saying he’s right, though these are sensible rules. I’m saying that he was no opponent of bank regulation when I worked with him. In fact, he complained—publicly, as I recall—that the banks had four lobbyists for each member of Congress…. Larry was a strong ally in arguments for continued fiscal stimulus when others on the team were ready to pivot to deficit reduction. He supported the rescue of GM and Chrysler… recognized that we needed to consider not just the big two, but the downstream supply networks….

I don’t believe he has an edge over Ms. Yellen on these regulatory issues, and certainly not on stimulus…. Various accounts suggest she spotted the housing bubble before most others, though she did not set off alarms about it. My sense from their work is that both candidates recognize the dangers posed by under-regulated financial markets; as far as Larry’s concerned, I can confirm that from personal experience.

Comments

I’ve remained neutral in the debate over Yellen vs. Summers for Fed chair. I continue to think they’re both fine choices… the differences… are far more narrow than you’d think from the frenzy…. Washington really loves a horse race and that the White House has misplayed this…. If I’ve put any bit of my thumb on the scale, it’s as follows, as quoted in the Times the other day: "All else equal, I would not lightly dismiss the opportunity to break a glass ceiling"…. But in the interest of fairness, I also wanted to weigh in briefly on ways in which Larry Summers views on financial market oversight… have been misrepresented…. I am well aware of mistakes he made in the Clinton years in this regard, but he learned from those mistakes, and frequently quoted Keynes’ line: “When the facts change, I change my mind.”…. Well in advance of the collapse of Bear and Lehman, Summers… wrote in late 2006 that “…innovations that contribute to risk spreading in normal times can become sources of instability following shocks to the system as large-scale liquidations take place.”